Why Dell Needs RadioShack

CEO Michael Dell says it's time to "go beyond" phone and Internet sales. Could this brick-and-mortar electronics retailer be the answer?

by Peter Burrows

Michael Dell is ready to consider some fundamental changes to the business model that made his namesake company famous and, more recently, troubled. That's the takeaway from an Apr. 27 e-mail he sent employees. After years of selling only via phone and the Internet, Dell told his troops that "the direct model has been a revolution, but is not a religion…. We will continue to improve our business model, and go beyond it, to give our customers what they need."

So here's an idea to consider: Why not buy RadioShack (RSH)? It sounds nuts, I know. How would buying an 86-year-old milquetoast retailer with moribund growth help Dell's (DELL) nascent turnaround effort?

At least on paper, this merger could plug some of the strategic holes that have appeared in Dell's approach in recent years. Obviously, RadioShack's 4,000-plus stores would give Dell a meaningful retail footprint, filling a critical need, given that more than 50% of all PCs sold in the U.S. are sold at brick-and-mortar stores.

Hard to Break In

And the stores could give Dell a way to finally make a dent in the market for consumer-electronics such as music players, TVs, and the like. (To me, the clearest proof that Dell had grown far too confident in its model was the belief that it could get mainstream consumers to buy expensive TVs online without being able to see the actual picture! It just doesn't make sense.)

Clearly, a RadioShack purchase would be hugely risky. Despite Apple's (AAPL) remarkable success with stores, the history of PC makers getting into retail is a dismal one. It means assuming heavy fixed costs on real estate and requires a different set of skills—one that Dell's management team, even with a host of new faces, doesn't have (see BusinessWeek.com, 3/2/07, "Dell's Doubtful Turnaround"). And it's hard to break into an already crowded market. Just ask Gateway (GTW), which closed the last of its Gateway Country Stores in 2004. "I'm not sure the market needs another 4,000 stores aggressively selling PCs," says NPD Group analyst Stephen Baker.

And RadioShack comes with plenty of baggage. The company has been losing market share to big-box retailers like Best Buy (BBY) and to online sellers catering to the consumers who eschew the big markups on the electronics—cables, batteries, connectors—that have long been RadioShack's bread and butter. Also, RadioShack is having the most trouble selling precisely the kinds of products that are most important to Dell. It has never been much good at selling PCs, and is struggling to sell TVs and cell phones and cellular service packages.

Taking a Multipronged Approach

Nor would RadioShack come cheap, thanks to cost-cutting by CEO Julian Day since he took the helm in July. While sales fell 14.5%, to $992 million, in the first quarter, earnings quadrupled. "The stock looks really expensive to us," says Michael Souers, an equity analyst with Standard & Poors, which like Businessweek.com, is owned by the McGraw-Hill Cos. (MHP). With the stock up from $16.49 on Dec. 21 to nearly $29 now, Souers thinks Dell would be buying at a near-high.

Indeed, Dell gives no indication it's headed down this path. For now, it appears to favor a multipronged approach. It has opened a Dell store in Dallas and had planned to open up another store outside of New York before recently deciding to postpone the project. Mostly, the industry buzz is that it will ink deals with other retailers to sell its wares, especially overseas, where its market share is generally far below the 20%-plus level in the U.S.